ABSTRACT
This article presents first estimates of the growth impact of the equilibrium real exchange rate (ERER) for a sample of 63 developing countries over 1970–2007. The results suggest that real exchange rate misalignment, not the level of the ERER, matters for macroeconomic performance in these countries.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 An increase in real exchange rate (RER) means depreciation.
2 Note that the index numbers are not comparable across countries. A RER above the equilibrium RER (ERER) indicates real undervaluation.
3 I set and
. Note that the results are not affected by these particular parameter settings.
4 All the system generalized methods of moments (SGMM) regressions pass the of overidentifying restrictions and the test for second-order autocorrelation suggesting that the SGMM moment conditions are not violated.
5 RER misalignment is calculated as , where positive values denote RER overvaluation. I use the absolute value of RER misalignment as a control due to the results of Schröder (Citation2013) who finds a negative growth effect of both RER overevaluation and undervaluation.